Profit sharing terminated, but $29 made its way back into account on 12/29/06

[Guest JReality]

I am self-employed and had a prototype Profit Sharing plan with a popular investment company. The plan began in 1992. In the fall of last year, I made the decision to terminate the plan by the end of 2006, after making a final contribution for '06. I made the final contribution on 12/1/06 . On 12/06/06, I mailed my broker the transfer instructions to rollover to an IRA with the reason being termination of the plan. On 12/11/06 the assets were transfered out of the PS plan's account and directly rolled over to an existing IRA. My PS account balance was zero at the end of that day. Yesterday I received an end-of-year statement, and I was frustrated to discover that a money market fund made a $29 interest payment to the PS account on Friday, 12/29/06 (even though all the assets had been rolled over into the IRA). This resulted in an end of year balance of $29 in the PS account. I checked online, and the investement company directly rolled the $29 into the IRA on 1/2/07 which was the first business day of 07.

Is 2006 still my final plan year for the PS plan, and on what day did my plan offically terminate (or does an exact date not matter)?

If 2006 is still my final plan year, then how does the end of year $29 balance affect my filing a 5500-EZ for the final play year. Do I report 2006 as the final plan year, with $29 as an end of year balance or can I report a zero balance? If I do need to report the $29 as end of year balance for a final plan year of 2006, will the IRS, or anyone else, try to claim my plan did not end in 2006 as a result of the $29 balance?

Thanks,

J.

Thanks

[Bird]

It happens all the time. I think the plan technically had assets as of 12/31/06 but for $29 I don't think anyone will argue if you use a $0 ending balance for your 2006 5500-EZ and don't file in 2007.

[Guest Pensions in Paradise]

I agree with Bird, I wouldn't worry about it.

One question though. Did you sign a resolution formally terminating the plan? It doesn't appear so from your post. If not, you need to sign one. You cannot just arbitrarily terminate a plan. It needs to be done by formal action of the plan sponsor.

[Guest JReality]

Question: just want to confirm that my letter needs to specify a termination date just before the assets were distributed, or at least specify that the goal was to terminate by the end of 2006? (even if the goal wasn't actually achieved until 1/07, which is actually what happened)

By the way, I called the IRS at their special 877 number for small employer plans (and recorded the conversation for my protection). Believe it or not, they said to file a form 5500-EZ using a calendar year with Jan 1st, 2007 as the start of the calandar year, with January 31st 2007 as the end of the year, and to check the short plan year box. They said I can use the 2006 form as long as I fill in those dates.

Next Question: Is my termination date still actually in 2006... in other words...does my having to file 5500-EZ with a short plan year for 2007 really mean my plan officially terminated in 2007? If so, does this affect my ability to open up a SEP-IRA for 2007. If so, then presumably I am still allowed to open a SEP-IRA for 2007, and would I need to do anything special to be allowed to open up the SEP-IRA?

J.

[Guest BXO]

That "Believe it or not" is entirely believable because it is the technicaly correct thing to do.

[Bird]

Yes, the IRS gave you a technically correct answer.

Yes, your written decision to terminate should have occured before any assets were distributed, otherwise, on what basis were they distributed?

You can terminate a plan in year 1 and still have a plan in existence in year 2 if assets still exist. But it doesn't affect your ability to have a SEP.